Many members of UK defined benefit (final salary) schemes are contracted out. How does this change a migrating member’s thinking when looking at a pension transfer to Australia?
Not everyone who is in a contracted out defined benefit scheme knows exactly what this means or the nature of the benefit. For those considering a UK pension transfer to Australia they would need pre-migration advice to be aware of the benefit they are potentially giving up from their existing UK scheme.
The final salary scheme benefit referred to as ‘contracting- out’ is the element of the pension that the employer has funded by redirecting the employees national insurance contributions, that were to provide them with the State Earnings Related Pension Scheme (SERPS), to the employer’s scheme.
In a defined benefit scheme, the pre 6th April 1997 benefits are known as GMP (Guaranteed Minimum Pension) and the post 6th April 1997 benefits are known as Section 9(2B) Rights.
Although the precise calculation of these pension rights is complicated, they could form a significant part of a member’s final salary income. The guaranteed nature of a defined benefit pension is lost when transferring to an Australian QROPS and, with it, the contracted out element.
An individual with a UK defined benefit scheme, on a permanent visa to Australia, may consider the tax free benefit gained from a transfer to an Australian QROPS appealing but they would need to weigh this against the benefit of guaranteed income for life from their UK Contracted Out Defined Benefit scheme.
